Organic Valley Case Study

Values-based food supply chains 1

Historical developmentIntroduction. Organic Valley began as the brand name used by a group of Wisconsin family farmers who, in 1988, organized an organic vegetable marketing cooperative under the name Coulee Region Organic Produce Pool (CROPP). A short time later, seven dairy farmers joined the co-op. Renamed the Cooperative Regions of Organic Producer Pools in 2001, the cooperative has grown to be the largest organic farmer-owned cooperative in North America, with over 1,300 members residing in over thirty states and the Canadian province of Ontario—or about ten percent of the organic farming community in the United States. Introduc-tions to Organic Valley can be found in the article “Natural Allies” in the 10/19/07 issue of the Madison Wisconsin weekly newspaper, Isthmus <www.thedai-lypage.com/isthmus/article.php?article=11261>, as well as the “Our Story” section of the Organic Valley website <www.organicvalley.coop/our-story/over-view/>.

Within a year of CROPP’s initiation, dairy prod-ucts became the cooperative’s leading sales category. Currently, more than 85 percent of Organic Valley’s sales are dairy related. Dairy farmers make up approx-imately three-quarters of the co-op’s members, with most residing in the Upper Midwest. In addition to dairy products, CROPP also sells organic eggs and produce under the Organic Valley label, as well as organic fruit juice and soy products. In 2007, sales of Organic Valley products topped $432 million and the cooperative employed over 400 people, most working in a newly constructed headquarters and distribution center in rural, southwestern Wisconsin. !e cooper-ative also sells organic beef, pork and poultry through a wholly owned subsidiary, the Organic Prairie Family of Farms. !is case study does not include an analysis of Organic Prairie. For an introduction to Organic Prairie, see www.organicprairie.com.

Philosophical and strategic goals. According to CEO George Siemon, “Organic Valley is a social experiment disguised as a business” (George Siemon, CROPP CEO, interview, 03/20/07). More informa-tion about Organic Valley’s philosophy and goals can be found in a 2002 interview with George Siemon on the Organic Valley website <www.organicvalley.coop/newsroom/about-organic-valley/ceo-interview/page-1/>.

Organic Valley mission statement. “!e purpose of the Cooperative Regions of Organic Producer Pools is to create and operate a marketing cooperative that promotes regional farm diversity and economic stability by the means of organic agricultural methods and the sale of organic products” <www.organicvalley.coop/our-story/our-cooperative/our-mission/>.

A broad definition of organic. CROPP defines organic as, “A philosophy and system of produc-tion that mirrors the natural laws of living organ-isms with an emphasis on the interdependence of all life” <www.organicvalley.coop/our-story/our-cooperative/our-mission/>. “Organic, as CROPP has framed it, takes the big view, focusing not just on farming techniques and fair pricing but on the larger values of sustainability and regional food systems” (Isthmus: <www.thedailypage.com/isthmus/article.php?article=11261>).2

Evolving organic food paradigm. Organic Valley has created a pyramid model that illustrates

Values-based food supply chains: Organic ValleySteve Stevenson, CIAS June 4, 2009Spokespersons: Jerry McGeorge and other Organic Valley managers Interview Dates: 03/20/07, 09/30/08 and 10/03/08Website: www.organicvalley.coop1

1All websites referenced in this document were accessed on 4/23/09. Links in pdf are live.2A broad definition of “organic” provides CROPP with a framework for adding additional values and di"erentiations to Organic Valley products as the organic industry becomes increasingly more like the conventional market.

“Organic Valley is a

social experiment

disguised as a

business.”—

CEO George Siemon

2 Organic Valley case study

what it calls the “evolving organic food lifestyle.” !e USDA organic standards banning the use of synthetic pesticides and fertilizers represent a bottom platform supporting additional agri-food related values such as humane animal treat-ment, local food and growing your own <www.organicvalley.coop/why-organic/organic-defined/evolving-organic-lifestyle/>.

Multiple background goals. Within these broad frameworks, Organic Valley engages multiple goals that address fair, farmer-determined food prices; good tasting, nutritious food; ecological and economic sustainability; healthy livelihoods and communities; cooperative principles; and respect for biological and human diversity. !e co-op’s website describes in detail how its goals go beyond USDA organic certification <www.organicvalley.coop/why-organic/organic-defined/evolving-organic-lifestyle/>. !e Isthmus article describes how Organic Valley incorporates economic, social and cultural agendas in its view of organic <www.thedailypage.com/isthmus/article.php?article=11261>.

Stable pricing through supply control. !rough matching supply with demand for its products, CROPP success-fully maintains for its members a stable pay price

throughout the year that reflects their expenses and profit needs. !is contrasts with conventional milk pricing systems, which can fluctuate widely over a given time period. For more information, see part three of the Isthmus article <www.thedaily-page.com/isthmus/article.php?article=11261> and “Achieving economic sustainability,” page 9.

Commitment to future farmers. “We know what our job is: It’s to get CROPP to the point where our farmers have a choice—they can farm, they can retire, they can sell to the kids. !at’s the exit strategy for our current farmers—it’s a future for their kids.”

(Mike Bedessem, CROPP Chief Financial O#cer, quoted in the Isthmus article <www.thedailypage.com/isthmus/article.php?article=11261>). Organic Valley is committed to creating opportunities for the next generation of family farmers, as evidenced by their contribution of $50,000 to the University of Wisconsin-Madison School for Beginning Dairy and Livestock Farmers <www.organicvalley.coop/newsroom/press-releases/details/article/organic-valley-contributes-50000-to-university-of-wiscon-sin-school-for-beginning-dairy-and-livesto-1/>.

Organizational development.A “New Generation” cooperative. CROPP is a new generation co-op in the sense that it brings on new farmer members only as markets for their milk are secured3 (See “Achieving economic sustain-ability,” page 9).

Leadership. CROPP is led by a seven-person, farmer-elected board of directors and an executive management team that guides the marketing and operations functions of the cooperative. For more information about the executive management team, see the Organic Valley website <www.organicvalley.coop/our-story/our-cooperative/our-leaders/>.

Growth with regionalization. While the Upper Midwest remains the center of the CROPP/ Organic Valley enterprise, the cooperative has established milk pools that provide both regional identity and fluid milk for processing and delivery in eight regions of the United States, from New England through Texas to the Pacific Northwest <www.organicvalley.coop/our-story/meet-the-farmers/meet-the-farmers/>. While the Midwest remains the primary source for “hard products,” or cheese and butter, demand has grown to the point where CROPP has begun to manufacture cheese in Vermont and butter in the Pacific Northwest (Jerry McGeorge, Director of Cooperative A"airs, interview, 09/30/08).

Growth with specialization. CROPP has spun o" two wholly owned, legally separate entities: Organic Prairie Family of Farms <www.organ-icprairie.coop>, which produces, processes and sells organic meat products, and Organic Logistics LLC,

3 For a critical analysis of aspects of new generation cooperatives, see www.rurdev.usda.gov/rbs/pub/jan01/critical.htm.

“We know what our job is: It’s

to get CROPP to the point where

our farmers have a choice—they

can farm, they can retire, they

can sell to the kids. That’s the exit

strategy for our current farmers—

it’s a future for their kids.”—Chief


which focuses on distribution logistics for Organic Valley, Organic Prairie and smaller organic food companies <www.organiclogisticsllc.com>. !ese new companies were spun o" both to provide them the full attention of their own governing boards and management, and to insulate the Organic Valley brand from any liability risks associated with the new enterprises (Jerry McGeorge, interview, 09/30/08).

Financial a!airs. CROPP is in strong financial shape as indicated by several factors:

Strong sales. Sales of Organic Valley products grew at annual rates between 20 to 38 percent during the past several years, with sales of $330 million in 2006, $432 million in 2007, and $527 million in 2008 (Jerry McGeorge, interview, 09/30/08).

Stable, premium prices to farmers. With few, and minor, exceptions, CROPP has been able to maintain stable pay above commodity prices to its dairy farmers in recent years. !e base pay price from 2006 through 2008 was $22.00, $22.50, and $24.75 per hundredweight (about 11 gallons) of milk, respectively (Jerry McGeorge, interview, 10/14/08).

Timely construction of new buildings. To accom-modate its growing operations, CROPP has built two new buildings in recent years, including its headquarters in LaFarge, Wisconsin (popula-

tion 786). !is is the same rural Wisconsin town where the cooperative began 20 years ago. !e second building is a state-of-the-art distribution center in a “green” industrial park close to Inter-state 90, located in the nearby Wisconsin town of Cashton, population 805 <www.organiclogisticsllc.com/facilities.html>.4 Consistent with CROPP’s broad definition of “organic,” both buildings were constructed according to the guidelines of the Leadership in Energy and Environmental Design (LEED) Green Building Rating System <www.usbbc.org>.

Annual profit distribution and debt. For the past several years, the CROPP Cooperative has generated profits of one to two percent of gross sales (!eresa Marquez, Chief Marketing Execu-tive, interview, 03/20/07). CROPP’s profits are distributed to CROPP farmers, employees and the community through an established formula <www.organicvalley.coop/our-story/our-cooperative/>. Funds for constructing and equipping the two new buildings were generated by a mortgage provided by the State of Wisconsin Investment Board and by a $21 million public o"ering of non-voting stock. !is left CROPP with relatively little debt—less than $10 million—to private banks (Mike Bedessem, interview, 03/20/07). For more infor-mation, see “Going mainstream” in the Isthmus article <www.thedailypage.com/isthmus/article.php?article=11261> and “Strategic partnerships replace capital and expertise,” page 8.

Historical performance indicators. Organic Valley’s strong financial performance is largely due to the success of its dairy pool, as well as the combination of competent leadership and CROPP’s historical timing. Developed in the late 1980s and early 1990s, the Organic Valley brand was well positioned to ride the 22 percent plus growth rates that organic food sales generated beginning in the late 1990s and continuing to the present (Jim Wedeberg, Dairy Pool Director, interview, 03/20/07). !e growth of organic dairy products and milk has been particularly robust. “!e growth of milk has been even faster than other organic products, in part, because of the concerns of parents … !ey’re thinking, ‘What are we putting in our children’s bodies?’ A lot of parents are concerned about growth hormones, pesticide residues, antibiotics.

4 A related article in Madison’s Capital Times discusses how Organic Valley raised capital for its expansions through the sale of Class E preferred stock <www.madison.com/archives/read.php?ref=/tct/2006/05/11/0605110451.php>.

0

200

400

600

200820072006

Organic Valley product sales

Sale

s in

mill

ions

of d

olla

rs

Year


!ose are the reasons they buy organic dairy” (Phil Howard, rural sociologist, quoted in the Isthmus article <www.thedailypage.com/isthmus/article.php?article=11261>) (See cross-case study observa-tions #1 and #2 on page 13).

Current dynamicsCreating and marketing di!erentiated, high value food products. Value chains are predicated on producing and marketing significant volumes of di"erentiated, higher value products (Appendix A, page 15).

Product di!erentiation and branding. !e Organic Valley brand is “…one of the stron-gest brands in the entire natural foods business” (Isthmus, <www.thedailypage.com/isthmus/article.php?article=11261>) and the “…number one brand in the country’s natural food stores” (Mike Bedessem, interview, 03/20/07). Including Organic Prairie’s meats, consumers can find the Organic Valley brand on over 500 products <www.organicvalley.coop/products/>. Organic Valley products are di"erentiated on multiple dimensions including product qualities, stories and values, and logistical services.

1) Leading product qualities is the organic di"eren-tiation, both the narrow USDA definition and CROPP’s broader definition <www.organicvalley.coop/why-organic/overview/>. While CROPP frames “… organic as a choice, not a moral issue” (Jim Wedeberg, interview, 03/20/07), it is clear that CROPP positions Organic Valley prod-ucts as strongly associated with superior taste, nutritional value and food safety, as well as with human, animal and environmental health. For more information, see the FAQ page of the Organic Valley website <organicvalley.custhelp.com/cgi-bin/organicvalley.cfg/php/enduser/std_alp.php>, particu-larly “About Conjugated Linoleic Acid” and “About Organic Valley Cartons.”

Organic Valley uses powerful and sophisticated outreach to parents and children including Ovie’s Underground <www.oviesdigs.

com>, Mothers and Fathers of Organic <www.organicvalley.coop/farm-friends/moms-dads-of-organic>, !e Organic Manifesto of a Biologist Mother <www.organicvalley.coop/farm-friends/moo/the-organic-manifesto/page-1/>, and We the Mothers <www.organicvalley.coop/farm-friends/moo/we-the-mothers/>.

In addition to the core organic messages associ-ated with Organic Valley products, CROPP also seeks di"erentiation through product value addi-tions including pasture butter, sliced cheese, and aseptic packaging:

“Greener Grass=Better Butter: Organic Valley Introduces Pasture Butter” 01/09/08 <www.organicvalley.coop/newsroom/press-releases/details/article/greener-grassbetter-butter-organic-valley-introduces-pasture-butter>; “Hold the Ice: Organic Valley Introduces Shelf-Stable Litres for Half and Half and Two Milk Varieties” 09/27/07 <www.organicvalley.coop/newsroom/press-releases/details/article/hold-the-ice-organic-valley-introduces-shelf-stable-liters-for-half-amp-half-and-two-milk-varieti/>; “Who Sliced My Cheese? Organic Valley Now O"ering Pre-Sliced Mild Cheddar, Baby Swiss, and Provolone” 09/27/07 <www.organicvalley.coop/newsroom/press-releases/details/article/who-sliced-my-cheeses-organic-valley-now-o"ering-pre-sliced-mild-cheddar-baby-swiss-and-provolone/>

In addition to the USDA Organic Certification, many Organic Valley products carry Orthodox Union Kosher Certification <www.organicvalley.coop/fileadmin/pdf/kosher.pdf>. See “Standards and certification,” page 5, for more information.

An array of Organic Valley products


2) Stories and values associated with the CROPP Cooperative and the Organic Valley brand engage not only human, animal and envi-ronmental health, but also the health of rural communities and the diversity of the nation’s farm structure. CROPP’s di"erentiation strate-gies communicate these values by emphasizing the family farm nature of the cooperative’s membership (see cross-case study observation #4). !e regional nature of its milk pools is reinforced through unique, regional milk cartons <www.organicvalley.coop/newsroom/photos/images/regional-milk-cartons/>.

Similar to the Country Natural Beef coopera-tive, Organic Valley employs CROPP farmers as “farmer ambassadors” for marketing in retail stores and food service institutions, as well as public appearances and speaking engagements (!eresa Marquez, interview, 03/20/07 and Jerry McGeorge, interview, 09/30/08) (See cross-case study observation #10). Interestingly, with all its emphasis on family farming, CROPP has not been able to craft a definition for “family farm” that works across all regions of the country. “Early on we struggled with a definition for a family farm but have backed o" … !ere’s too much di"erence in regional cultures. For instance, Midwest family farmers milk their own cows … while family farmers in the West and South hire milkers. We are now more interested in whether farmers want to cooperate, and we do on-farm checks of farms that milk more than 500 cows” (Jim Wedeberg, interview, 03/20/07).

3) Finally, CROPP seeks di"erentiation through important logistical services that include food quality monitoring, traceability and recall capacity, and prompt delivery. Organic Valley milk is regularly tested for pathogens at the farm level. Final products are routinely evaluated by inspectors at processing plants, and CROPP has the laboratory capacity at its LaFarge head-quarters to spot-check products such as cheese, butter and dried milk powder. Furthermore, the cooperative and its trucking partners have the capacity to trace (and recall, if necessary) every case of product that carries the Organic Valley

label (Je" Kragt, Director of Dairy Production, interview, 03/20/08).

CROPP achieves logistical e#ciencies through regionalization. Organic Valley’s fluid milk can be delivered to a customer’s distribution center the day after orders are received. Other products take longer, but most can be delivered within two to three weeks (Je" Kragt, interview, 03/20/07). Over the past two to three years, Organic Valley has transitioned into being the U.S. price leader for most organic dairy prod-ucts. With this position comes the requirement that “CROPP couples the highest quality products with on-time delivery. …To earn the premium, you need to deliver the goods” (Jerry McGeorge, interview, 09/30/08).

Standards and certification. Food supply chains that are larger and more complex than direct-to-consumer marketing require clearly communicated standards and, often, third-party certi-fication (See Appendix A).

All producers, products and manufacturing plants associated with Organic Valley are inspected annually and certified according to USDA organic standards. Certification is done by Oregon Tilth Certified Organic, a USDA-accredited, indepen-dent, third-party organic certification agency based in Salem, Oregon.5 CROPP CEO George Siemon was instrumental in creating the USDA standards. For a critique of the USDA’s organic framework and Siemon’s response, see “Sleeping with the enemy?” section of the Isthmus article <www.thedai-lypage.com/isthmus/article.php?article=11261>. Some Organic Valley products are also kosher <www.organicvalley.coop/fileadmin/pdf/kosher.pdf>.

Identity preservation throughout the value chain. A feature of the value chain business model for food is that farmers and ranchers have the right

“CROPP couples the

highest quality products with

on-time delivery. …

To earn the premium, you need

to deliver the goods.”—

5 CROPP’s organic certificates can be viewed on its website: <www.organicvalley.coop/trade/certificates/>; national organic standards: www.organicvalley.coop/why-organic/organic-defined>.


An Organic Valley dairy producer

to maintain their identity and brand on their products as deeply into the supply chain as they choose. Co-branding with other value chain partners is a viable strategy (See Appendix A and cross-case study observation #3). For an example of co-branding, see the “Identity preservation” section of the Shepherd’s Grain case study.

In CROPP’s early days, as much as 60 percent of its milk was sold anonymously into the conventional market (Jim Wedeberg, interview, 03/10/08). Today, all of CROPP’s dairy prod-ucts are marketed as organic, with roughly 60 percent sold under the Organic Valley label <www.organicvalley.coop/products/>. !e 40 percent of products not sold under the Organic Valley label include milk and non-fat dry milk powder sold to the New Hampshire-based dairy company, Stony-field Farm,6 for yogurt sold under that company’s label (25 percent), as well as milk sold to several supermarket chains for their house brand organic milk (15 percent) (Mary Ewing, Production Department, interview, 03/20/07). For more infor-mation, see “Going mainstream” in the Isthmus article <www.thedailypage.com/isthmus/article.php?article=11261>.

Interaction and feedback from customers. !e Organic Valley website is set up for interaction with retail <www.organicvalley.coop/farm-friends/overview/> and wholesale <www.organicvalley.coop/trade/overview/> customers. CROPP produc-tion and logistical functions are sensitive to quality control issues, traceability and product recall.

Creating e!ective internal organizational forms. Successful value chain businesses aggregate and market product through e"ective organizational structures and develop and/or hire competent leader-ship and management (See Appendix A).

National cooperative. See “Organizational devel-opment,” page 2.

Regional organization. See “Organizational devel-opment,” page 2, and cross-case study observation #8.

Competent leadership and management struc-tures. CROPP is led by a seven-person, farmer-elected board of directors and an executive manage-ment team.7 !e board of directors meets monthly. CROPP farmers also participate in the cooperative’s governance through a dairy executive committee that is composed of one farmer representative per milk pool, which adds up to about 40 representa-tives. !is committee provides feedback to the board and management through semi-annual pool meetings and other channels (Jerry McGeorge, interview, 09/30/08) (See cross-case study observa-tions #7 and #11).

Selecting markets and value chain partners. Successful value chain partners have similar values, di"erent competencies and complementary business models (See Appendix A and cross-case study obser-vation #12).

Farmer partners. In addition to cooperative atti-tudes, requirements for dairy farmer membership in CROPP include such criteria as organic certi-fication, su#cient scale (bulk tank with capacity for five milkings), high milk quality (low somatic cell count), an equity investment of 5.5 percent of

6 For an introduction to Stonyfield, see the “About Us” page on the company’s website <www.stonyfield.com>. Stonyfield o"ers an example (parallel to Whole Foods) of increasing corporate concentration in the natural foods sector with the acquisition in 2002 of a controlling interest in Stonyfield by the large French-based consumer products company, Groupe Danone <www.danone.com>. In turn, the West Coast yogurt company, Brown Cow Farm <www.browncowfarm.com>, was added to the corporate mix in 2003. 7 See the biographies of the CROPP management team and their mixture of agriculture- and food system-based back-grounds, often organic related <www.organicvalley.coop/our-story/our-cooperative/our-leaders/>.


annual income, and farm location in reasonable proximity to current milk pool trucking routes <www.farmers.coop/farmers-wanted/cropp-stan-dards-and-membership/> (See Appendix B on page 20 and cross-case study observation #5).

Good examples of CROPP’s farmer members can be found at the “Meet the Farmers” section of the Organic Valley website <www.organicvalley.coop/our-story/meet-the-farmers/meet-the-farmers/>, as well as in the Isthmus article <www.thedailypage.com/isthmus/article.php?article=11261>. !e cooperative provides an impressive range of services to its members including a toll-free farmer hotline, consultation from a sta" milk quality team and veterinarian, as well as information regarding where farmers can purchase feed, pest control supplies and veterinary supplies that meet organic standards <www.farmers.coop/resources/overview/>.

Given the growing market for organic dairy prod-ucts, CROPP actively seeks new, qualified farmer members <www.farmers.coop/farmers-wanted/overview/>. To bolster recruiting, the cooperative provides consulting and financial assistance to help farmers make the transition to organic dairying <www.organicvalley.coop/newsroom/press-releases/details/article/organic-valley-announces-transition-to-organic-fund/>.

Retail and food service partners. Sales of organic dairy products are experiencing the fastest growth in mass-market stores, while sales in natural food stores are relatively flat. “We can’t be afraid of new people coming into our industry ... Yes, we’re growing in the mass market, but our love and devotion is still in the natural market … !at’s the group we cater to. !ey are the core organic shopper. !ey are the pioneers” (!erese Marquez, interview, 03/20/07). Organic Valley’s partnerships with retail customers are characterized by: a) a clear sense of mutual benefit; b) comfort with financial transparency (cost structures can be shared and honored); and c) openness to a long-term relationship. CROPP currently does little business with the food service sector, and sees this as a potentially important area for growth (Jerry McGeorge, interview, 10/03/08). Processing and distribution partners. CROPP owns only one processing facility—a butter-

manufacturing creamery in the rural community of Chaseburg, Wisconsin. Other Organic Valley dairy products, as well as soy and juice products, are processed on contract by outside companies strategically located throughout the country. !e processing of fluid milk is the most dispersed, with plants contracted in California, Washington, Colorado, Texas, Minnesota, Wisconsin, Indiana, New Jersey and New York (Doug Bean, manager of product transportation, interview, 03/20/07) (See cross-case study observations #13).

Processing partners are selected initially on the basis of geographical location. Matching processors with CROPP farmers is sometimes a chicken-or-egg calculation. In order to be profitable, 30,000 to 40,000 pounds of milk needs to be collected daily on each collection route. !e capacity to deliver high-quality products is a second criteria, particu-larly important for cheese manufacturers (Mary Ewing, interview, 03/20/07). “We like to partner with family-owned, independent processors where we can … A good example is the family-based Schroeder Dairy in Minnesota. !is is easier to do with cheese plants than with milk plants …We contract with a Dean’s milk plant in New York which has the capacity for ultra-high temperature pasteurization” (Mary Ewing, interview, 03/20/07) For more information on Schroeder Dairy, see www.schroedermilk.com/contract_packaging.cfm.

Processing agree-ments are evolving from handshake understandings to more formal contracts. !is is particularly the case with regard to assuring the capacity to convert the spring flush of milk to nonfat dry milk powder. CROPP has entered into written contracts for such dry milk conversion with the large Midwestern dairy coop-erative, Foremost Farms <www.foremostfarms.com> (Mary Ewing, interview, 03/20/07).

CROPP’s approach to distribution parallels its approach to processing. Products are distributed

“We like to partner with

family-owned, independent

processors where we can… A

good example is the family-

based Schroeder Dairy in

Ewing, Production

Department


primarily by trucks. CROPP owns no delivery trucks. !e cooperative has contracts with transportation companies for the distribution of Organic Valley products across the country. Trucking companies are selected based on their rates, capacity, service, scale and fit with CROPP’s support for smaller, family-owned businesses. “We seek out trucking firms that specialize in particular geographical “lanes,” such as from Wisconsin or Minnesota to Florida. It’s a win/win deal. We o"er them a consistent weekly load which enables them to find return loads. In exchange, they can provide us with better rates and service. …We do background checks on all our carriers. !e best carrier is not always the cheapest. We prefer firms with 50 or less trucks. Family-owned companies are a good fit with family farms” (Doug Bean, interview, 03/20/07). While CROPP trucking agreements are handshake understandings, the cooperative requires proof of insurance coverage and rate structures (Doug Bean, interview, 03/07/07). Organic Valley is considering changes to its current approach to distribution. “We would consider owning our own trucks if contracting became too expensive …We are looking closely at transporting more product by railroad as fuel prices force higher trucking rates” (Doug Bean, interview, 03/20/07).

CROPP’s manager of product transportation, Doug Bean, has worked in the grocery business and owns a small trucking firm. !is is a good example of bringing professionals with key managerial compe-tencies and similar values into enterprises owned by farmers and ranchers.

Strategic partnerships replace capital and exper-tise. One of the reasons that CROPP succeeded when other organic dairy firm start-ups in the 1980s failed is because, “… through most of our life we did not sink money into bricks and mortar” (Jim Wedeberg, interview, 03/20/07). By contracting out key parts of its processing and distribution, CROPP employed strategic partnerships to reduce capital expenditures and broaden its expertise.

However, within the past several years, CROPP has built a new company headquarters and distribution center, and it may build additional distribution centers on the east and west coasts. !ese decisions

to build were made because CROPP was seriously outgrowing its administrative and warehousing space, and was committed to remaining in rural communities. “Given our druthers, we’d prefer to not invest in bricks and mortar, but we need to look at the available options” (Jerry McGeorge, interview, 10/03/08). “Build the business and then build the buildings” (George Siemon, interview, 03/20/07) (See cross case observation #9).

Developing the distribution sector as a service and income center. !e Organic Valley distribu-tion center at Cashton, Wisconsin, was completed in conjunction with the development of Organic Logistics, LLC, as a new service and profit center for CROPP <www.organiclogisticsllc.com>.

Designed to provide a range of high quality, a"ordable distribution services for smaller organic food companies, this new enterprise is a win/win for CROPP, which needs full trucks to garner the best “weight breaks” through its contracted freight agreements, and the smaller companies it serves through Organic Logistics (Doug Bean, interview, 03/20/07). !e new, green, state-of-the-industry distribution center is also an important platform on which to build future logistical capacities for the cooperative and its partners.

Developing e!ective supply chain logistics. In addition to values-based business relationships, successful value chains require increasingly sophis-ticated logistical systems as they grow larger and more complex (See Appendix A and cross-case study observation #6).

Production and aggregation. In 2007, slightly over 50 percent of the milk from CROPP’s 900 plus dairy farmers was processed and sold as fluid milk (Mary Ewing, interview, 03/20/07), with the rest used for cheese, butter, cottage cheese and other Organic Valley dairy products <www.organ-icvalley.coop/products/>.

CROPP sta" members develop milk collection routes within geographical regions that result in e#cient, profitable collections and deliveries to the contracted dairy processing plants. !ese aggrega-tion logistics, as well as farmer relations, are super-vised by CROPP-employed Pool Coordinators who


often live in the regions they serve. For a listing of Pool Coordinators, see www.farmers.coop/us/support/contactus.

Processing and distribution. Processing is done on contract by dairy manufacturing plants located close to the regionally organized milk pools. Hauling large loads of milk achieves scale and processing e#ciencies, as “…scale helps CROPP recruit e#cient, high-quality manufacturing plants, and reduces ‘line loss,’ the eight to ten percent of milk that remains in the processing plant’s lines upon shut down” (Mary Ewing, interview, 03/20/07).

Processed fluid milk is distributed regionally by contracted trucking firms that pick up Organic Valley-branded milk at the processor’s loading dock and deliver it to customers’ distribution ware-houses. Other Organic Valley products, including cheese, cottage cheese, eggs and juice, are currently routed through CROPP’s distribution center in Cashton (Doug Bean, interview, 03/20/07). If plans to establish major CROPP distribution centers on the east and west coasts materialize and Organic Logistics LLC continues to grow, future distribution of Organic Valley products will be increasingly accomplished regionally.

Accounting. All invoicing, payment and accounting functions are performed by CROPP employees under the direction of CROPP’s chief financial o#cer (See cross-case study observation #6).

Logistical coordination. Logistical coordination is done through the new distribution center under the direction of CROPP’s chief operating o#cer (See cross-case study observations #6 and #9).

Achieving economic sustainability. In successful value chains, commitments are made to the economic welfare of all strategic partners (See Appendix A).

Pricing philosophy. Stable prices for farmers are fundamental to CROPP’s mission and business model. Price stability is accomplished through controlling the supply of Organic Valley prod-ucts. Operationally, this means: 1) managers from CROPP’s marketing, sales and production depart-ments participate in weekly coordination meet-ings (!eresa Marquez, interview, 03/20/07); 2)

new CROPP farmers are brought on only after markets have been secured for their milk; 3) a reserve pool of organic dairy farmers supplies milk during periods of the year when demand outstrips supply; 4) fluid milk is converted into dry milk powder and stored during periods of the year when supply exceeds demand; and 5) the cooperative retains the right to drop purchases from its newest farmer members. Reaching the point where 100 percent of CROPP’s milk is sold as organic has been crucial to making the numbers work (Jim Wedeberg, interview, 03/20/07) (See cross-case study observations #1 and #2).

CROPP translates its values into value-chain busi-ness decisions about pricing. In 2000, CROPP was facing an oversupply of milk and needed to decide whether to drop the farmers most recently signed on to the milk pools or to reduce all farmers’ pay price by 30 cents per 100 pounds. “!e farmers voted to drop the collective pay price” (Jim Wedeberg, Mike Bedessem and !eresa Marquez, interviews, 03/20/07) (See cross-case study observation #1).

In 2004, CROPP had been selling Organic Valley products to Wal-Mart for several years. In keeping with its business model, Wal-Mart began pitting its organic milk providers against one another, demanding lower prices and more milk from each of them. Meeting Wal-Mart’s demands would not only have shortchanged CROPP’s smaller customers, but also altered the cooperative’s vision for value-chain business relationships and long-term economic sustainability. So, CROPP made a decision nearly unheard of in the conventional food industry and said ‘no’ to Wal-Mart. “We asked ourselves ‘Which retailers have been with us in the past and will stick with us down the road?’ We’re independent. We answer to ourselves, not Wall Street, so we can do it. We can keep our soul” (George Siemon, quoted in !e Nation <www.thenation.com/doc/20080324/hightower_demarco>).

“S -

cient, high quality manufacturing

plants, and reduces ‘line loss,’ the

eight to ten percent of milk that

remains in the processing plant’s

Ewing, Production Department


Payment practices. !e cooperative’s board of farmer directors, in dialogue with the executive management team, determines the target payment price to CROPP’s 900-plus dairy farmers. Payments are initially calculated on a base component price determined by adequate levels of butterfat, protein and other solids of a given farm’s milk. !e base component price is then adjusted up or down after a series of milk cleanliness tests including somatic cell and other bacteria counts. Finally, a regional premium is added to the adjusted price based on the costs of producing milk in given regions of the country.

In 2008, regional price premiums per hundred-weight of milk varied from $1.50 in the Upper Midwest and West to $5.00 in New England and the Southeast. Finally, $75 is deducted from each month’s milk check to pay for trucking, and CROPP farmers are required to make a one-time purchase of preferred stock in the cooperative equal to 5.5 percent of their gross annual sales to CROPP. For a description of CROPP’s payment plan and information on regional premiums, see the CROPP website <www.farmers.coop/farmers-wanted/pay-prices>.

CROPP is currently reviewing its methodology for calculating its base price and regional premiums (Jerry McGeorge, interview, 10/03/08).Farmer contracts with CROPP can be terminated by either party with a 180-day notice, and CROPP makes it clear to its members that the pay prices are target prices that can be adjusted downward depending on the financial performance of the cooperative. For the past several years, CROPP has earned a profit of one to two percent of gross sales, and nearly half of this profit has been distributed to its farmer members. For some farmers in some years, this bonus has amounted to over $100,000 (!eresa Marquez, interview, 03/20/07) (See Appendix B).

Pricing Organic Valley products. When pricing its dairy products, CROPP starts with the price paid to farmers and adds on layers of costs associ-ated with the processing and distribution of the product, including a reasonable profit margin. Pricing decisions are made by the cooperative’s vice

president for sales and chief financial o#cer, who also take into account market conditions and the competitive landscape (Jerry McGeorge, interview, 10/03/08) (See cross-case observation #1).

Communicating sustainable economics in the marketplace and with enterprise members. CROPP spokespersons emphasize the importance of stable, cost of production-based pricing for both farmers and customers through negotiations based on financial transparency. Given the volume of organic milk that CROPP markets, the cooperative is able to influence the price paid to organic farmers throughout the industry (Jerry McGeorge, inter-view, 10/03/08) (See cross-case study observations #1 and #3).

Acquiring technical support. In its early years, CROPP received assistance with organizational structuring from groups like Cooperative Develop-ment Services <www.cdsus.coop> and similar groups. Currently, CROPP provides support to other groups on a range of fronts, including distribution services for smaller organic companies through Organics Logistics, LLC, and targeting ten percent of annual profits to a range of community organizations. CROPP CEO George Siemon was instrumental in creating the USDA organic standards.

Future dynamicsInternal organizational issues.

Revitalizing company culture. !e CROPP cooperative is growing rapidly. Fifty percent of its farmers and 35 percent of its employees have joined within the last three years. !is makes socializa-tion into company culture particularly important (Jerry McGeorge, interview, 10/03/08). “Culture is key and needs to be reinforced from all sides: employee culture, farmer culture and consumer culture” (George Siemon, interview, 03/20/07). Mecha-nisms for reinforcing company culture include significant use of the Organic Valley website <www.organicvalley.coop>, interaction between employees and farmers at outreach events, and the semi-annual meetings of the 40 milk pools. CROPP screens for “cooperative” people in selecting farmers and employees. “CROPP spends considerable time exposing employees and farmers to the co-op’s mission and the meaning of that mission” (Jerry McGeorge,


interview, 10/14/08).

Leadership succes-sion. While the current CROPP leaders are not near retirement, the cooperative’s management is concerned about succession issues. “!e first generation of managers is either organic farmers or people with a passion for organics.

…!ere’s a concern about the second generation” (Mike Bedessem, interview, 03/07/07). “Company culture is strong … I’m not worried about the managers. …I’m more worried about the farmers …Democracy can be weak … I have faith in the current board, but need to educate them on succession issues” (George Siemon, interview, 03/20/07).

Other issues. CROPP’s decision to temporarily contract with a 5,000-cow organic dairy farm to maintain its Texas milk pool resulted in conflicts over the cooperative’s family farm values. !is issue was covered by a Madison newspaper, !e Capital Times: <www.madison.com/tct/news/stories/294113> (See cross-case observation #14).

Issues with supply chain partners. Food service as a growth area. CROPP sees food service as a potentially significant growth area (Jerry McGeorge, interview, 10/03/08).

Challenges with organic grain production. Organic feed production is not keeping up with organic livestock production, resulting in expen-sive feed prices and a growing advantage for dairy farmers with su#cient land to grow their own feed (Jerry McGeorge, interview, 10/03/08).

Potential shifting of distribution by rail. See “Processing and distribution partners,” page 7, and the following section on distribution e#ciencies.

Economics and e"ciencies. Increased distribution e"ciencies. CROPP has laid out the following scenario for its future logis-tics: 1) East and West Coast distribution centers, with the Cashton, Wisconsin, complex serving as the Midwest’s distribution hub and the replenish-ment center for the other distribution centers; 2) increased use of railroads for CROPP distribu-tion—both east/west and north/south lines—as fuel prices climb and regulations on truck drivers increase; 3) increased use of “inter-modal systems,” which are wheeled containers that interface with trucks, railroads and ships for product transporta-tion to Hawaii and Alaska (Doug Bean, interview, 03/20/07).

Reducing farmers’ input costs. Farmers’ input costs can be reduced through 1) on-farm energy genera-tion including methane digesters, windmills, solar power, micro-hydropower and biodiesel; and 2) regional purchasing collectives for organic animal feed.

Strategies for a maturing market. Continued growth of Organic Logistics LLC as a service/profit center. See “Selecting markets and value chain partners,” page 6.

Growth in new market sectors: CROPP has targeted several new market sectors: 1) food service; 2) value-added products such as pasture-based butter and sliced cheese; and c) markets outside the contiguous 48 states, such as Alaska and Hawaii (Jerry McGeorge, interview, 10/03/08). “Milk has been the leader in mainstream supermarket outlets, but we still have plenty of room for placement of other products such as cheese, butter, juice and eggs” (Jerry McGeorge, interview, 10/14/08).

Organic plus: Moving up the organic pyramid. What features of Organic Valley’s pyramid model for the organic lifestyle might be e"ectively engaged to further di"erentiate and sell its products in an organic industry that is becoming more like the conventional market?8 Fair trade? Pasture-based farming systems? Bioregional foods and diets? Food miles? Animal welfare? Family farming? “I have teenage children who are very aware of issues

Organic Valley CEO George Siemon

8 !e pyramid model can be viewed at www.organicvalley.coop/why-organic/organic-defined/evolving-organic-lifestyle/.


like global warming and carbon footprints. … !eir purchasing choices are very likely to be quite di"erent. …!at should be good news for an organic food company” (Jerry McGeorge, interview, 10/03/08).

A mature Organic Valley: Has CROPP grown up? Criteria for “too big.” CROPP has historically believed the cooperative would be too large when it could no longer serve its farmers and customers well (Mike Bedessem, interview, 07/20/07; Jerry McGeorge, interview, 10/03/08).

Size has important positive consequences. CROPP’s size and the strength of the Organic Valley brand enable the cooperative to exert signifi-cant influence over product quality and farmer pay price in the organic dairy sector (Mike Bedessem, interview, 07/20/07; Jerry McGeorge, interview, 10/03/08).

Regionalization has enabled CROPP to grow and remain e!ective. Clearly growth through regionalization has been a successful strategy for CROPP, enabling both logistical e#ciencies as well as regional identity and brand growth. “One future scenario would be toward more autonomy by our regional pools and a “federation of co-ops”… but that would be a ways down the road and require lots of discussion … Our regional structure is currently working well” (Jerry McGeorge, interview, 10/03/08).

Positioning value chains in a troubled and contracting economy. “!is is a time of incredible flux. We don’t have many answers because things are too fluid at the moment … sales are definitely slowing down and we run the risk of becoming oversupplied. However, like all prudent businesses, we are currently testing our assumptions, re-examining our business practices and trying to position ourselves to provide our customers with products that they truly value” (Jerry McGeorge, interview, 10/14/08).


Cross-case study observations

Key Economic Decisions1. All four enterprises have developed pricing systems based on two principles: 1) supply management and

stable pricing, and 2) cost of production-based pricing. Creative work is being done (especially by Shep-herd’s Grain) to adapt value chain pricing mechanisms to volatile commodity markets.

2. All four enterprises recognize the need to balance supply with market demand through membership numbers. !is is relatively easy to do when markets are stable or expanding predictably and much more di#cult when demand falls.

3. All four enterprises depend on selling a high percentage of products as identity-maintained, di"erenti-ated, higher-value products; and having commodity market options available as back up for unsold product. Both Country Natural Beef and Shepherd’s Grain sell their products to processors, yet retain identity, pricing and marketing authority. !eir processors can sell their extra inventory into commodity markets, if necessary.

4. It is challenging but necessary for these businesses to communicate the deeper, more complex values that di"erentiate them from the mainstream. !ese di"erences include land stewardship, fair returns to all supply chain participants and maintenance of diverse farm and ranch structures. Shepherd’s Grain is a leader in communicating land stewardship values.

Internal Enterprise Decisions5. !e screening of potential new producer-members by existing members in terms of both production

capabilities and integrity is an important process for all four enterprises.

6. In all cases, competent managers serve as the pivot persons for the complex and time-sensitive logistical strategies that the supply chains require. As value chain enterprises grow and become more complex, the accounting functions (bookkeeping, invoicing and paying producers) are often the first to be separated o" from the logistical bundle.

7. !e two more mature cases—Organic Valley and Country Natural Beef—have developed leadership structures that couple farmers and ranchers with food system professionals, and implemented leadership succession strategies that maintain managerial competency and company culture.

8. Several of the case study enterprises are exploring business expansion models based on multi-regional growth and autonomy that build on core company competencies and infrastructure. Organic Valley is a leader in this sort of expansion model.

9. !e four case enterprises all display a reluctance to invest in bricks and mortar. While Organic Valley did ultimately choose to build a new headquarters and distribution center, it takes advantage of much infrastructure owned by supply chain partners. !e other three enterprises seek to own as little bricks and mortar as possible.

10. All of the enterprises employ farmers and ranchers as business representatives, storytellers and listeners with Country Natural Beef the most successful.


Supply Chain Decisions11. All four enterprises have moved toward filling an “honest broker/fairtrader” role. !e three farmer

and rancher-based enterprises earned respect of their supply chain partners and thereby gained this responsibility, while Red Tomato has assumed a fair trader business role. In these roles, the four case enterprises are good examples of business models designed for the protection of a range of collectively important spaces, or “commons.” See Peter Barnes. 2006. Capitalism 3.0. San Francisco: Berrett-Koehler Publishers.

12. !e enterprises often interact di"erently with “pioneer/smaller/niche” partners as compared to “follower/larger/mainstream” partners. Shepherd’s Grain is particularly clear regarding these di"erences. With a few notable exceptions, the value chain partners of the four enterprises are privately owned and not subject to Wall Street pressures.

13. For the three enterprises that deal with processed food products (Country Natural Beef, Organic Valley and Shepherd’s Grain), access to appropriately scaled and regionally located processing facilities has been critical to their success.

14. Value-chain-linked enterprises are particularly susceptible to perceived contradictions within their

practices and/or the practices of strategic partners. Examples include Beef Northwest’s labor issues for Country Natural Beef and the family farming flap associated with a large Texas organic dairy farm for Organic Valley.


Appendix A

Values-Based Food Supply Chains:Strategies for Agri-Food Enterprises-of-the-MiddleSteve Stevenson ([email protected]) and Rich Pirog ([email protected])www.agofthemiddle.org

De!nitions and distinctions!e terms value and values are used in di"erent ways when referring to food production and food business networks. 1. Value-added is used to characterize food prod-

ucts that are converted from a raw state through processing that gives the resulting products an incremental value in the market place. An incre-mental value is realized from either higher price or expanded market. For example, jams, cheeses and pre-cooked meats are considered value-added products.

2. Value-added is also used to characterize food products that gain incremental value in the marketplace through di"erentiation from similar products based on attributes such as geographical location, environmental stewardship, food safety or functionality. Examples of this type of higher value product include locally grown produce, organic or IPM-grown fruits, antibiotic and/or hormone free meat, or functionally specified hops and baking flours.

3. !e words value and values are also used to char-acterize the nature of certain business relation-ships among interacting food business enter-prises. In general, this collection of relationships is known as a supply chain (see below). When these relationships are expressly based in an artic-ulated set of values, they are becoming known as values-based supply chains or value chains.

Some people in the agri-food business commu-nity use the term value chain to focus on supply networks that deal with food products given incre-mental value through processing and/or attribute di"erentiation (#1 and #2 above). In the Agricul-ture of the Middle (AOTM) and Association of Family Farms (AFF) initiatives, the term values-based value chain embraces both product di!er-entiation and the characteristics of the business relationships within a food supply network.

A food supply chain is a network of food-related busi-ness enterprises through which products move from production through consumption, including pre-production and post-consumption activities. Typical links in the supply chain are:

inputs producer processor distributor wholesaler retailer consumer

For example, a food supply chain featuring pork products might include feed suppliers or veterinar-ians, a cooperative of farmers, meat packing and fabrication plants, food distributors, marketers, supermarkets and consumers. Pre-production activities might include university-based research and development, and post-consumption activities could include waste disposal and recycling, while government regulations would likely be engaged throughout the chain.Increasingly, supply chain analyses also are including such pre-production links as agricultural research (e.g., genetics) and post-consumer links such as waste disposal and recycling <www.valuechains.org/valuechain.html>.

Conventional food supply chains exhibit the following key characteristics:1. Business relationships within the supply chain

are often framed in win-lose terms, with resulting levels of inter-organizational mistrust. Rela-tionships are constructed as competitive, even adversarial, whereby each company seeks to buy as cheaply and to sell as expensively as possible.

2. Farmers, ranchers and fishers are treated as inter-changeable and exploitable input suppliers, often operating in restricted markets or under short-term contracts where they usually bear the risks.

3. !e benefits and profits from the selling of finished food products are unevenly distributed across the supply chain, with food processors and marketers usually receiving a disproportionately higher share.


4. Operations are increasingly located and coordi-nated on a national and international scale, with food production, processing and marketing sited according to short-term economic gains for those parties who dominate the chain.

Traditional food supply chains can handle both undi"erentiated (commodity) and value-added food products.

Values-based food supply chains di"er from traditional food supply chains in the following important ways: 1. Business relationships among strategic partners

within value chains are framed in win-win terms, and constructed on collaborative principles that feature high levels of interdependence and inter-organizational trust. All value chain partners have a strategic interest in the performance and well-being of other partners.

2. As producers of di"erentiated food products, farmers, ranchers and fishers are treated as strategic partners with rights and responsibilities related to value chain information, risk-taking, governance and decision-making.

3. Commitments are made to the welfare of all stra-tegic partners in a value chain, including appro-priate profit margins, living wages and business agreements of appropriate duration.

4. Operations can be e"ectively located and coor-dinated at local, regional, national and interna-tional scales.

!ese values-based food value chains are distinguished from traditional food supply chains by the combina-tion of how they di"erentiate their products (food quality and functionality, and environmental and social attributes) and how they operate as strategic partnerships (business relationships). Value chains can be smart from both business and ethical perspectives.

Mid-tier food value chains are values-based strategic alliances between midsize, independent (often cooperative) food production, processing, distribu-tion and sales enterprises that seek to create and retain more value on the front (farmer/rancher) end of the chain, and e"ectively operate at regional levels with significant volumes. Significant volumes for these value chains normally range between quanti-ties handled by commodity systems and amounts produced for direct marketing. Regionality will vary with geography, geographic identities, food products and market demographics.

General characteristics of values-based value chains

Value chains have the capacity to combine scale with product di!erentiation, and cooperation with competition, to achieve collaborative advantages in the marketplace.

Value chains are successfully employed in such higher-volume, complex product industries as cars and trucks, consumer electronics and high-end apparel. !e automobile industry provides good examples of cooperation within supply chains and competition between chains.

!e Toyota value chain1 is a good example of distin-guishing between strategic (value adding) partners and non-strategic suppliers—makers of engines and transmissions contrasted with makers of belts and hoses:a. Successful value chains choose strategic partners

that bring distinctive competencies but similar values, visions and goals.

Value chains contrast with two other models for complex business networks:a. Competitive bidding (arm’s-length) relationships

with suppliers; andb. Internal ownership of business activities (vertical

integration).

1For more information on Toyota, see:Dyer, Je"rey. 2000. Collaborative Advantage: Winning !rough Extended Enterprise Supplier Networks. New York: Oxford University Press.Handfield, Robert, and Ernest Nichols Jr. 2002. Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems. Upper Saddle River, NJ: Prentice Hall.


Value chains outperform other complex business models in rapidly changing markets.

Value chains emphasize high levels of performance and inter-organizational trust.High levels of performance are essential to consis-tently deliver high quality products and services: a. Develop appropriate standards and conduct

performance evaluations across the entire value chain;

b. Employ quality assurance systems (with realistic allowances for surprise events);

c. Employ continuous improvement systems and target support for underperforming partners in the value chain.

Inter-organizational trust among strategic business partners is pivotal: a. Inter-organizational trust is the mutual confi-

dence that business partners will fulfill their agreements and commitments and will not exploit each other’s vulnerabilities;

b. Inter-organizational trust is di"erent from inter-personal trust: the trust will still be in place even if key people leave their respective organizations;

c. Inter-organizational trust is built upon the fairness, stability and predictability of agreements among strategic partners.

Value chains emphasize shared values and vision, shared information (transparency) and shared decision-making among the strategic partners.Strategic partners need to share common values and a common vision regarding product quality, partner relationships and customer treatment.

Successful value chains develop e"ective systems for sharing information and governance: a. Shared information (transparency) improves

productivity, enables rapid response to market changes and e"ectively engages discriminating customers. !e Dell computer company, which has eliminated retail outlets and middlemen by selling custom-made computer systems directly to customers over the internet, employs a particu-larly e"ective information system to commu-nicate with customers and strategic business partners;

b. Shared governance means all strategic partici-pants benefit from the value chain’s business, and all have a say in business developments.

Value chain governance can be framed in familiar terms and mechanisms: a. Legislative (setting standards for the chain); b. Judicial (monitoring performance in the chain); c. Executive (coordinating procedures and flows in

the chain).

In successful value chains, all partners experience an authentic sense of fairness and justice: a. Distributive justice, where rewards and profits are

distributed fairly among all value chain partners; b. Procedural justice, where rules of business in the

value chain are experienced as fair by all partners. Value chains make commitments to the welfare of all strategic partners in the chain, including appro-priate profit margins, fair wages, and long-term business agreements.Partners in Japanese value chains express their rela-tionships as “co-existence and co-prosperity:” a. Partners have strategic interests in the others’

welfare; b. Together, they race to the top instead of the

bottom.

Strategic partners are rewarded through agreed-upon formulas for adequate profit margins above produc-tion and transaction costs, and for adequate returns on investment: a. Cost-based pricing in which profit margins of

strategic partners are built in from the beginning; b. Living wages and supportive workplaces for

employees of strategic partners; c. Community-supporting business practices, e.g.,

opportunities for local community investment in value chain businesses

Cost-based pricing requires a high degree of infor-mation sharing regarding sensitive economic data: a. Sharing economic information can be a challenge

for new value chains; b. All partners are required to know their true cost

structures (production and transaction costs); c. Ongoing cost reduction strategies across the chain

result in shared benefits.


Successful value chains are built upon long-term strategic partnerships: a. Agreements and contracts are for appropriate,

extended time periods; b. Extended agreements provide confidence for

investment in new productive or cost-saving assets;

c. Legal contracts are often relaxed with develop-ment of substantial trust in mature value chains. Strategic relationships are increasingly held together by mutual obligations and opportuni-ties, not legal force.

Additional applications to mid-tier food value chains

Mid-tier food value chains are appropriate for situations in which regionally oriented markets are developing for significant volumes of di!erentiated, value-adding food products.1. !e combination of significant volume and

di"erentiated food products corresponds to the needs of a growing food service sector of the U.S. economy. Examples include Bon Appétit Management Company <www.bamco.com>, Hot Lips Pizza <www.hotlipspizza.com>, Sysco <www.sysco.com> and Shepherd’s Grain <www.shepherdsgrain.com>.

2. Regional supermarket and restaurant chains seeking to distinguish themselves from national chains are also likely candidates for value chain partnerships. Examples include New Seasons Market <www.newseasonsmarket.com>, Burg-erville <www.burgerville.com> and Oregon Country Beef <www.oregoncountrybeef.com>.

3. As evidenced by these four case studies, signifi-cant opportunities are emerging for farms-, ranches- and fisheries-of-the-middle.

Horizontal collaborations are often required to assemble su"cient volumes of di!erentiated food products for mid-tier value chains.1. Multi-lateral collaborations such as co-ops and

Limited Liability Corporations (LLCs). Examples include Organic Valley <organicvalley.coop> and !umb Oilseed Producers <www.thumboilseed.com>.

2. Bi-lateral collaborations such as aggregating firms. Examples include Niman Ranch <www.

nimanranch.com> and Laura’s Lean Beef <www.laurasleanbeef.com>.

Appropriate standards and e"cient methods of third-party certification are applied throughout the value chain. 1. Standards related to key value chain dimensions

(for example, food quality, environmental stew-ardship, animal welfare, workplace conditions and business ethics);

2. E#cient, computer-based certification systems.

Farmers and ranchers can maintain ownership and control of brand identities on food products throughout the value chain.1. Development and defense of regionally mean-

ingful identities and brands;2. National seal to support regional and local

brands.

Given historically adversarial business models in traditional U.S. food supply chains, it will likely take time for all strategic partners in new food value chains to become comfortable with alterna-tive business models based on trust and organiza-tional interdependence.1. Participatory governance structures will be

particularly important for food value chains that engage strategic partners of di"ering size and experience;

2. Non-strategic partners will likely be rare in mid-tier food value chains.

Challenges faced by farmers, ranchers and !shers when constructing mid-tier food value chains

Farmers, ranchers and fishers face several types of challenges in building mid-tier food value chains:

Finding appropriate value-chain partners and devel-oping mechanisms for building trust, transparency and decision-making;

Determining e"ective strategies for product di"er-entiation, branding and regional identity;

Developing food quality control systems that address weather, seasonality, multiple production


sites and quality-preserving distribution mecha-nisms;

Determining appropriate strategies for product pricing that are based on understanding true cost structures. Two contrasting strategies are cost-based pricing and paying premiums above commodity market prices;

Building su#cient trust among competing producer groups to form networks of farmers, ranchers and fishers large enough to supply significant and consis-tent volumes of high-quality, di"erentiated food products;

Acquiring adequate capitalization and competent management;

Accessing adequate technical, research and develop-ment support;

Creating meaningful standards and consistent certi-fication mechanisms across the value chain; and

Developing equal economic power for value chain negotiations.


Appendix B CROPP cooperative dairy member agreement

!is agreement is made between the Cooperative Regions of Organic Producer Pools – CROPP Cooperative, LaFarge, WI, (the “Cooperative”) and the undersigned producer (the “Member”).

!e Member shall satisfy all membership requirements of the Cooperative. Member agrees to be bound by both Cooperative bylaws and this agreement.

Members of the Cooperative, who are actively shipping milk, are members of the CROPP Dairy Pool. Member pledges all organic dairy production to the Cooperative, and assigns all rights to proceeds from sales of the milk/dairy products. !e Members hereby appoints the Cooperative as its exclusive agent in the marketing of organic milk/dairy products.

!e Member acknowledges receipt and will abide by the CROPP Dairy Pool Manual and all the policies therein. !e Member agrees to participate and abide by policies and decisions of the CROPP DAIRY EXEC-UTIVE COMMITTEE and the CROPP Board of Directors.

!is agreement shall be in e"ect continuously from date hereof, subject to the right of either party to termi-nate said Agreement at any time by giving 180 days notice in writing.

!e Member shall be a certified member in good standing of an Organic Certification organization approved by the Cooperative. Member represents that all production is produced using certifiable practices and shall take full responsibility for all organic claims of member production.

!e Cooperative shall provide accurate records of member milk production, equity position, and quality results to the Member.

!e Member agrees that equity distributions by the Cooperative shall be based on their volume of production in proportion to the production of all dairy members.

!e Member shall satisfy the requirements of the Dairy Pool Capital Base Plan by the purchase(s) of Preferred Stock. Purchase(s) of the Preferred Stock must be made according to the guidelines of the CROPP Dairy Pool. If the Member breaks this contract then, in addition to all of it’s other rights and remedies, the Board of Directors has the discretion as to the timing of the redemption of the Preferred Stock.

!e Cooperative will pay the Member for their certified organic milk according to the rates and programs established by the Dairy Executive Committee and the Board of Directors for the Member’s region. !e Member acknowledges that the CROPP pay program is a target and may require a price reduction if the actual financial performance of the Co-op requires it.

!e Cooperative cannot guarantee results or profit and therefore, the Member agrees to release the Coopera-tive and its employees from any and all liability for any damages that may occur as a result of the Coopera-tive’s advice or requirements regarding production.


!is project was supported by the National Research Initiative of the Cooperative State Research, Educa-tion and Extension Service, USDA, Grant #2006-55618-17014.

Organizations involved with this report:

#e National Task Force on Renewing an Agriculture of the Middle is concerned with a disappearing sector of mid-scale farms/ranches and related agrifood enterprises that are unable to successfully market bulk commodities or sell food directly to con-sumers. See www.agofthemiddle.org or contact convening chair Fred Kirschenmann, Iowa State University, 515-294-5588, [email protected]; or administrative chair Steve Stevenson, University of Wisconsin-Madison, 608-262-5202, [email protected]. !e task force has three areas of emphasis:

New business and marketing strategies will seek to create business networks or “value chains” that link farms/ranches-of-the-middle with food system partners to meet a growing demand for di"erentiated, high-quality food products. Currently operating as the Association of Family Farms.

Public policy changes include those that can be secured in the relatively short term that directly a"ect middle market development, and more systemic policy changes over an extended period of time that will fully equalize economic environments for farms/ranches-of-the-middle.

Research about and education support from scientists associated with the initiative and land-grant university community on the business and policy strategies, at both the regional and national levels.

#e Center for Integrated Agricultural Systems (CIAS) is a research center for sustainable agriculture in the College of Agricultural and Life Sciences, University of Wisconsin-Madison. CIAS fosters multi-disciplinary inquiry and supports a range of research, curriculum and program development projects. It brings together university faculty, farmers, policy makers and others to study relationships between farm-ing practices, farm profitability, the environment and rural vitality. For more information, visit www.cias.wisc.edu or call 608-262-5200.

Many thanks to the organizations and individuals who provided the information for the case studies.

Edited by Cris Carusi, CIAS.

Publication design and layout by Ruth McNair, CIAS

Photos from Organic Valley Cooperative.

Organic Valley Case Study

Documents

Transcript of Organic Valley Case Study